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UGI Corp.'s Investments Are Starting to Pay Off

Warmer-than-normal weather over the past few years has had a noticeable impact on UGI's (NYSE: UGI) financial results because the company's subsidiaries rely on cold weather to fuel demand for the heating fuels they distribute. Unfortunately, those weather patterns didn't improve during the company's fiscal second quarter, which dragged down demand in several of its segments. While the company's investments to lessen the impact of the weather on its results are starting to pay off, that still might not be enough to enable the company to hit its full-year targets.

UGI results: The raw numbers

Metric

Fiscal Q2 2017

Fiscal Q2 2016

Year-Over-Year Change

Adjusted net income

$231.8 million

$216.2 million

7.2%

Adjusted EPS

$1.31

$1.24

5.6%

Data source: UGI Corporation.

Image source: Getty Images.

What happened with UGI this quarter? 

The weather stayed above normal again:

  • The company's AmeriGas Propane Partners (NYSE: APU) subsidiary posted mixed results. While revenue rose 4.4% to $863.6 million, retail gallons sold declined 6% due to temperatures that were 13.3% warmer than normal and 2.9% warmer than the prior year. Worse yet, the critical heating months of January and February were 9.9% warmer than last year. That warmer weather, along with much higher prices for LPG, drove an 8.2% decrease in Adjusted EBITDA versus the prior year at AmeriGas Propane.
  • Adjusted income at UGI's international segment rose 8.2% during the quarter to $122.9 million. Driving that result was a 5.2% increase in retail gallons sold versus the prior year due in part to cooler weather than last year, though the temperature remained well above normal. Meanwhile, operating expenses declined thanks to lower integration expenses associated with the Finagaz acquisition.
  • Midstream and marketing income also increased versus last year, rising 8.4% to $83.8 million. The company benefited from higher natural gas prices versus the prior year as well as higher peaking revenue thanks to improved prices for pipeline capacity.
  • The UGI utilities segment's income edged up 0.9% to $106.1 million. While temperatures were 11.7% warmer than normal across its service area and 3.3% higher than last year, the company's gas utility experienced higher throughput while UGI gas captured higher rates as a result of a recent rate case settlement.

What management had to say 

CEO John Walsh commented on the company's results by saying:

This quarter demonstrated the increasing resilience and strength of our business, as well as the benefits of our investments in Europe, as the company delivered strong results despite a heating season that was warmer than normal in all of our businesses. Our Midstream and Marketing and Utility businesses generated higher adjusted earnings than the prior year despite weather that was warmer than last year, and significantly warmer than normal. These results reflect our investments in projects that are less dependent on weather, a focus on operational efficiency, and the impact of an increase in UGI Gas base rates that went into effect in October 2016. Our International business continued to deliver outstanding results and generated $11.6 million higher adjusted net income than the prior year, an increase of 16%. AmeriGas delivered solid results despite facing exceedingly warm temperatures in the quarter as well as average LPG prices that were 85% higher than the prior year period.

As Walsh points out, the company continues to face a significant headwind from warmer than normal temperatures. To combat that problem, the company has made investments in Europe, including Finagaz, which paid off during the quarter. In addition, the company continues making investments in the U.S. that are also working to reduce the impact of the weather. 

Meanwhile, the company keeps pushing forward with new projects to reduce future weather-related earnings volatility. One of the largest is the PennEast pipeline, which earlier this month received the Final Environmental Impact Statement from regulators. That puts the project one step closer to approval, keeping it on pace to enter service next year.

Looking forward 

That said, despite all the positives on the quarter, Walsh warned that "[b]ased on the results of the first half of the year, and in particular the exceedingly warm weather we have experienced, we are expecting full year adjusted EPS to be at the lower end, or slightly below, our guidance range of $2.30 to $2.45."

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends UGI. The Motley Fool has a disclosure policy.